Several multinationals doing business in India are on the hook for significant back taxes, interest and potential penalty payments after the Indian Supreme Court overturned a lower court’s interpretation of tax treaty implementation.
The decade-old case affects taxation at the source of dividends, fees for technical services and the like, remitted by Indian subsidiaries of multinationals.
Four companies — Nestle SA, Steria (India) Ltd, Concentrix Services Netherlands BV and Optum Global Solutions International BV — won favorable rulings on the issue in the Delhi High Court, which were challenged by the tax department and overturned by the Supreme Court.
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The apex court order issued on Thursday said that lower tax rates in new treaties do not “automatically” apply to treaties with countries that contain clauses on parity — also known as the “most favored nation” clause — separately notified by the Indian government.
The companies were covered by tax treaties between India and the Netherlands, France and Switzerland — all three Organisation for Economic Co-operation and Development members with a similar most favored nation clause in the treaties.
The judgement would directly affect the firms involved and cast a shadow on arrangements involving other companies and other treaties. Lower taxes paid or withheld based on the earlier interpretations might need to be topped up.
There would also be an impact on the viability of certain existing business arrangements.
Multinational companies would face practical issues in recovering tax amounts from recipients, said Dinesh Kanabar, CEO of Dhruva Advisors LLP, a Mumbai-based tax and regulatory consultancy.
The resulting tax demands would revive concerns about the ease of doing business in India at a time when the country is seeking to lure investments away from China.
“This will raise once again the issue of the lack of certainty for MNCs [multinational corporations] operating in India,” tax advocate Rohan Shah said.
Foreign companies followed the law as declared by high courts. As a final decision has taken several years in litigation, the government should offer a “standstill” on taxes for past periods and implement the Supreme Court order prospectively, Shah said. “Absent this, the situation will be chaotic.”
There is a bigger concern. The judgement indicates that the government has the power to notify only some aspects of a treaty.
“Not notifying beneficial clauses or partly notifying or notifying after a length of time effectively amounts to a unilateral treaty override,” Kanabar said.
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